Primary Health Properties PLC: Update

Summary

• Primary Health Properties, the FTSE 250 healthcare real estate investment company, has announced that Harry Hyman will officially step down as the company's chief executive officer (CEO) at the company's 2024 annual general meeting (AGM), which we estimate will take place between 1st April 2024 and 11th June 2024.
• The company previously indicated/announced that Mr. Hyman will step down around that time, so the announcement is in-line with the market expectations.
• Accordingly, we have maintained our forecasts, and estimate that the expected return of an investment in Primary Health Properties over the next 12-months is ccc%. In other words, an £100,000 investment in the company is expected to return £ccc in 12-months time.
• We note that the degree of risk associated with an investment in Primary Health Properties is relatively 'high', with the company's shares having an adjusted beta that is 47% below the market (0.531 vs. 1).
• All-in-all, assuming that a suitable return level in the next 12 months is 10% or more, then an investment in the company is considered to be a 'suitable' one.

Succession Planning

On 12th December 2022, the company announced that Harry Hyman will officially step down as the company's chief executive officer (CEO) at the company's 2024 annual general meeting (AGM), which, based on the dates of the company's last five AGMs, we estimate will take place between 1st April 2024 and 11th June 2024, and on a Wednesday.

The company previously indicated/announced that Mr. Hyman will step down around that time, so the announcement is in-line with the market expectations.

The search for the next CEO is being led by the company's chairman and non-executive director Steven Owen. To help maintain the independence of a non-executive director position, the position is normally served by someone for a maximum nine years. For Mr. Owen, the nine years will elapse in January 2023; however, to ensure a smooth transition of the CEO position, he will remain as the chairman until the new CEO appointment, subject to shareholder approval. Also, he will remain a member of the Nomination Committee and ESG Committee until the appointment, and cease to be a member of the Remuneration Committee from 31^st December 2022.

The dates of the company's last five AGMs

#	Date	Day of the week
1	27th April 2022	Wednesday
2	12th May 2021	Wednesday
3	1st April 2020	Wednesday
4	11th June 2019	Tuesday
5	18th April 2018	Wednesday

Risks

As with any investment, investing in Primary Health Properties carries a level of risk. Overall, based on the company's market beta (i.e. 0.531), the degree of risk associated with an investment in Primary Health Properties is relatively 'high'. Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice.

For us, currently, the biggest risk to the valuation of the company relates to macro-economic factors, in particular unexpected and sudden changes in inflation and interest rates movements.

Valuation

Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or less, the approach that is more accurate is the relative valuation approach, so that's the approach that we suggest using to determine the estimated value of the company.

What's the expected return of an investment in Primary Health Properties using the relative valuation approach?

Accordingly, we estimate that the expected return of an investment in Primary Health Properties Plc over the next 12-months is ccc%. In other words, an £100,000 investment in the company is expected to return £ccc within 12-months from now. The assumptions used to estimate the return figure can be found in the table below.

Assuming that a suitable return level in the 12 months is 10% and Primary Health Properties Plc achieves its expected return level (of ccc%), then an investment in the company is considered to be a 'suitable' one.

What are the assumptions used to estimate the return figure?

Key inputs

Description	Value	Commentary
Which type of multiple do you want to use?	P/FFO	The FFO does not account for depreciation in properties but rather adds back the depreciation value back to the net income. Furthmore, FFO deducts any gains or losses from the sale of assets, since including the transaction would result in discrepancies in the revenues reported in each period. Accordingly, we suggest valuing the company using the Price to Funds From Operations (P/FFO) ratio.
In regards to the P/FFO multiple, for the FFO figure, which year to you want to use?	Twelve months ahead	Research suggests that when using the relative valuation approach, it's best to use a time period of 12 months or less. Accordingly, for the FFO figure, we suggest using the twelve months ahead.
In regards to the P/FFO multiple, what multiple figure do you want to use?	18x	According to Bloomberg, Primary Health Properties Plc closest peers trade on a multiple of 18x.
Which financial forecasts to use?	Proactive Investors	Here, we have used the forecasts of Proactive Investors.
What's the current value of the company?	£981.20 million	As at 22nd November 2022, the current value of Primary Health Properties Plc is £981.20 million.
Which time period do you want to use to estimate the expected return?	Between now and one year time	Research suggests that when using the relative valuation approach, it's best to estimate the expected return of the company between now and one year time.

Health Care REIT

Peers

Company name	Bloomberg ticker	Primary exchange	Classification	Industry	Market capitalisation (GBP)	BF P/FFO	Yield (%)	Interest cover (x)	Total debt/total capital
Primary Health Properties PLC	PHP LN				1,459m	0.168	5.95%	N/A	46%
Assura PLC	AGR LN		Multi Asset Class Own & Develop	Real Estate Owners & Developers	1,578m	--	5.77%	3.77	41%
Aedifica SA	AED BB		Multi Asset Class Own & Develop	Real Estate Owners & Developers	2,660m	14.8279	4.75%	5.91	43%
Target Healthcare REIT PLC	THRL LN		Multi Asset Class Own & Develop	Real Estate Owners & Developers	477m	--	8.78%	8.35	25%
Cofinimmo SA	COFB BB		Multi Asset Class Own & Develop	Real Estate Owners & Developers	2,340m	11.3873	7.12%	7.80	44%
Impact Healthcare Reit PLC	IHR LN		Multi Asset Class Own & Develop	Real Estate Owners & Developers	404m	0.1111	6.51%	N/A	22%

Sensitive analysis

The two main inputs that result in the greatest change in the expected return of the Primary Health Properties Plc investment are, in order of importance (from highest to lowest):

1. The P/FFO multiple (the default multiple is 18x); and
2. The twelve months ahead FFO forecast (the default forecast is €98.78 million).

The impact of a 10% change in those main inputs to the expected return of the Primary Health Properties Plc investment is shown in the table below.

Primary Health Properties investment expected return sensitive analysis

Main input	10% worse	Unchanged	10% better
The P/FFO multiple	43%	57%	73%
The twelve months ahead FFO forecast	43%	57%	73%

Appendix

healthcare properties in the UK and Ireland.